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Friday, 25 May 2012

MUSCAT — Apart from the stable economy, the presence of a favourable demography in Oman provides ample potential for the growth of Islamic banking in Oman.

According to reports, about 20 per cent of adult Omanis prefer a Sharia compliant bank for their banking needs. This trend is similar to overall 22 per cent Sharia compliant assets in the GCC region. In Oman 60 per cent of the population is less than 30 years of age.

“Also with the government plans towards diversification of economy we anticipate the financing needs to increase in Oman thereby providing opportunities for the newer banks”, say analysts of Gulf Baader Capital Market in a report on Bank Nizwa initial public offering.

Since the launch of Islamic products in the GCC region, all individual countries have reported higher levels of growth in Islamic assets and liabilities. Islamic banking assets in the GCC region have reported compound annual growth rate (CAGR) of 20.4 per cent over the last three years.

“We expect Oman to follow a similar trend and grow at a faster pace in the initial years of operations led by substantial unfulfilled demand for the Sharia products”, says the report.

In the Sultanate there are a number of conservative customers, who want to deal only with Sharia compliant banks. Further there remains the possibility that Sharia compliant funds parked by Omani investors overseas will come back to the local banking system with the opening up of Islamic banks.

As per market reports, during 2010 the global Sharia compliant assets were estimated at $1 trillion with retail banking continuing to be the main driver of the industry’s growth.

The Islamic finance represented only 1 per cent of the total global financial assets, which provides a case for higher growth rates going forward.

“With the emergence of Islamic banking in Oman, not only a new market is being formed with wider variety of products and services, there is also expectation of shift from the conventional banking to the Islamic banking”, says the report. Referring to Bank Nizwa, the first dedicated Islamic bank in Oman, the report says:

“The bank will be better placed to attract high-margin retail and institutional clients who are inclined to opt for Sharia compliant products. However, overall the industry is likely to become more competitive, which would in turn put pressure on the margins of all banks”.

In the Mena region, the Islamic banking assets are worth $400 billion, forming about 14 per cent of the total asset base of $3 trillion. As per the prospectus, the global Sharia banking industry has been growing at higher rates between 2003 and 2010.

In the GCC Region, the Islamic Banking assets stood at about $285 billion (as at end 2008).

The total Sharia compliant banking assets forms about 22 per cent (end 2008) of the total banking assets in the region. This shows the potential demand of Islamic Finance in Omani market too.

Oman’s financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole.

The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.

Total assets increased by 18 per cent to RO 18503.1 million in February 2012 compared to RO 15693.7 million in February 2011.

Credit constituted bulk of the banks’ assets which remained by and large stable.

While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.

On a year-on-year basis, total credit expanded by 17.9 per cent to RO 12,782.2 million at the end of February 2012 and accounted for 69 per cent of total assets.

The banking industry around the world has been passing through a critical phase since 2008.

Most of the banks and financial institutions, particularly in the western countries, were busy in repairing their balance sheets, infusing capital, and recovering from the state of credit crunch.

April and May looked to be banner months for sukuk. Two deals, one from the Saudi Electricity Company (SEC) and the other, from Banque Saudi Fransi, the Saudi lender part-owned by Credit Agricole, marked two rare but popular US dollar denominated issues which were highly prized by investors. The benchmark deals helped underscore growing investor appetite for Islamic bonds.

Saudi Fransi, Saudi Arabia’s fifth largest bank, launched $750m five-year Islamic bond mid-month at par amid strong investor demand for the issue in mid-May. The issue is the bank’s first sukuk sale under a recently-established $2bn debt programme. The sukuk came in at a spread of 185 basis points (bps) over midswaps, at the lower end of its ­indicated range. Initial price guidance was 200bps over midswaps. The deal was heavily oversubscribed, attracting investor orders worth $4bn, under­scoring growing investor appetite for sukuk issuance. The sukuk carries a profit rate of 2.947%. Citi, Deutsche Bank and Credit Agricole were arrangers on the deal.

The deal marks the second dollar denominated sukuk emanating from the Kingdom so far this year. Saudi Electricity’s $1.75bn sukuk, issued three weeks earlier, raised the bar with some $17.5bn in investor orders. The Saudi Electricity Company (SEC), which is rated A1/AA-/AA- all Stable, is the largest utility in the GCC. The issue was made up of a five year $500m tranche and a $1.25bn ten year element. The ­transaction was led by Deutsche Bank and HSBC marked the inaugural ­international sukuk issuance by SEC and the largest international debt capital markets issuance out of Saudi Arabia for some years. The issuer also wanted to achieve a long tenor bond supported by a diversified investor base, which the arrangers helped secure after a comprehensive global road show. The dual-tranche Sukuk transaction was well received globally and generated a large order book with over 440 investors placing orders.

Shortly after the issue the SEC’s chief executive Ali Al Barrak explained, “The sukuk issue is important to us for strengthening our funding mix, accessing longer-tenor financing, broadening our investor base and helping us become more in line with our global peers while supporting SEC’s capital expenditure requirements.”

Saudi Arabian dollar-denominated bonds come to market relatively infrequently, and attract substantial demand when they do; illustrating that Gulf issuers are benefiting from their own economic micro-climate and are providing something of an oasis for investors starved of comprehensive corporate issuance opportunities.

Investor appetite for the deals was marked and might just be a sign of a growing preference for Islamic instruments. The evidence is still thin: however Banque Saudi Fransi’s existing $650m conventional bond, which carries interest of 4.5% and matures in 2015, was bid at just over 103.97 in the second week of May, to yield about 2.8%, coming under some selling pressure ahead of the new issue.

Also in mid May Islamic Development Bank (IDB) enhanced the size of its medium term notes (NTN) ­programme from $1.5bn to $3.5bn, which will be issued in both London and Kuala Lumpur. The IDB’s forthcoming medium term sukuk (which is expected to range between five and seven years) will be issued under this programme sometime in June and is expected to raise between $750m and $1bn. Funds will be used to provide blended credits in support of capital goods projects in member countries. IDB, which is AAA-rated, priced a $750m five-year sukuk last May at a spread of 35bps over midswaps to yield 2.35%. According to local Saudi press reports, the sukuk will be 144a-compliant and, therefore, open to investors from the United States; though the IDB did not respond to questions about its forthcoming issue.

Elsewhere, bond traders expect the first restructuring of an Islamic bond. United Arab Emirates’ Dana Gas, the Sharjah-based energy company, is expected to restructure its $920m sukuk in coming weeks as investor concerns have heightened over the ability of the utility to meet its payment ­commitments. Up to now no Islamic bonds have been renegotiated though there have been examples of outright defaults (in both Saudi Arabia and Kuwait).

Dana has reportedly hired Blackstone, Latham Watkins and Deutsche Bank to advise on the various options for repaying the sukuk. The company is “committed to finding a consensual solution that is equitable to all stakeholders”, it said in a statement to the Dubai stock exchange.

Meantime, the Central Bank of Bahrain (CBB) says its monthly issue of the short-term Islamic leasing bonds, Sukuk Al-Ijaara, has been oversubscribed by 175%. Subscriptions worth BD35mwere received for the BD20m issue, which carries a maturity of 182 days. The expected return on the issue, which matures in mid-November 2012, is 1.34%.

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